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          Private Rented Sector & Build-to-Rent: Political Landscape

          Welcome back to our series of articles on the Private Rented Sector (PRS) and Build-to-Rent (BTR).  In our previous edition we discussed the BTR market and the products being made available.  In this edition, we will cover the current political sentiments and some examples of areas where extra care is needed.

          Date: 06/06/2019

          The 'housing crisis' has been a political manoeuvring tool for a while and no government has yet to fully offer a solution to it.  That may have something to do with the fact that housing developers are not likely to suddenly increase supply to the rate which would address the issue if to do so would mean lower returns; not unless there was either a carrot (unlikely) or a stick (probably less likely).

          This means that the BTR product is timely and generally finds political support.  Most schemes are being placed in previously built-up areas and so don't find the same levels of opposition usually found in extending the urban landscape.  However, that doesn't leave the PRS market or BTR assets with a clear pass as there have been a few developments recently which may start to impact the sector.

          It is worth keeping in the back of your mind that political support for tenants will only continue to grow as their numbers do vs the proportion to other occupancies.  Speaking in support of the interests of 'generation rent' is likely to be a strong factor in getting someone elected.  Translating this for investors means the support will likely be there in order to build but it's likely there will be less support once the asset is occupied.

           

          Section 21

          A good example of the recent shift is the overtures on the use of [Section 21 of the Housing Act 1988], which allows landlords to evict tenants at the end of their term without fault and without having to go through potentially costly/lengthy court procedures.  We'll have to ignore for the time being the fact the model being proposed already exists (they're called Assured Tenancies, rather than Assured Shorthold Tenancies) and they aren't used for a reason; landlords don't want to be stuck with their tenants. 

          Landlords want flexibility and they have the substantive interest in the property but it is now being argued whether that interest should trump the right of a tenant to a consistent home. We haven't seen any draft wording for the legislation on the proposals yet so it's still too early to start looking at creative ways to protect against the consequences.  However, when you consider the ways which have been used to avoid leasehold enfranchisement or to creatively use that same legislation to buy-out expensive ground rent interests, landlords can be hopeful a solution might present itself.

           

          Houses in Multiple Occupation (HMOs)

          Similarly, the government have recently (October 2018) implemented changes to the rules on HMO's. This is having a big impact in the PRS market as the requirement to have three or more floors has been brought down to two.  The impact isn't likely to affect larger developments as only having three storeys is typically bad value.  The change is designed to capture more house conversions (think student digs where the old living room becomes a bedroom).

          It's important to note what the intent behind the regulations was and it's clear when reading around the subject and the wording of the legislation itself.  It's designed to maintain living standards in areas where it has become too common to cram as many people into a space as possible.

          There are three different types of HMO licencing so, starting with the mandatory test, your premises is an HMO where:

          1. the property is occupied by five or more tenants from more than one household (i.e. blood relatives or partners) as their main residence; and
          2. the property has shared basic amenities (e.g. cooking or washing facilities).

          Chances are, this catches most in the BTR market.  However, there are a couple of exemptions, most importantly that purpose-built blocks of three or more self-contained flats are excluded from falling within the mandatory test.  The rationale behind this is that the buildings meeting the exemption should have been designed and built in line with current practices and the expectation of the type of living carried on there.  The standards on the size of bedrooms and number of washing machines etc should all form part of the DNA of the building and therefore should not need policing.

          However, local authorities have powers to require additional licensing and selective licensing, setting out geographical areas or specific types of premises which require licensing.  They can also include exemptions of their own but that means each development has to be considered on its own in line with whatever licensing is in place.

          As a further note of care, buildings which have been converted may not benefit from the purpose-built exemption and will have to satisfy a separate test.  This is likely to be more of an issue as prime sites disappear and other opportunities are explored to convert office and retail premises as and when demand for those premises dwindles.

          The costs of licensing are likely to have a big impact on revenues generated as, in some cases, each individual flat within a building may require its own licence.  These costs might be absorbed or passed on to tenants, depending on whether rents are inclusive or if there is a service charge.  You can't currently insure against this and getting caught out isn't an option as there is criminal liability attaching to a breach of the legislation.

           

          The Future

          The government have been walking the path to reduce the benefits to private individuals owning a lettings portfolio.  Regulations have been introduced and strengthened (e.g. registration of deposits, energy efficiency etc) and taxes have been re-jigged a number of times to make the prospect of a second (third, fourth etc) house less attractive to the individual.

          This weights the scales towards putting the bulk of the PRS market into the hands of the fund and institutional investors.  Not so much good news for the middle-income person, but another tick in the box for the BTR sector, which is better able to absorb those costs or pay for the advice to structure in a way to mitigate them.

          With the way things are going, and certainly as the currently accepted trends seem to show, renting is only likely to increase in proportion.  It remains to be seen whether this will continue and the expectations/aspirations to buy a home will diminish or whether there will be a correcting event.

          History has shown us that governments are willing to legislate to meet home ownership expectations, with Right to Buy as part of the Thatcher government's Housing Act 1980 and the Major government's Leasehold Enfranchisement as part of the Leasehold Reform, Housing and Urban Development Act 1993.  There have been rumblings from certain corners the next step could be to offer something similar to occupational tenants and that could be catastrophic for the BTR sector.

           

          Sign-off

          Our next article will focus on some examples of legal pitfalls and how to protect long term investment strategies.


           

          DWF in an international legal business, acting for a large number of PRS and BTR investors and developers on schemes and assets all over the UK.  Please feel free to speak to one of our real estate specialists below for more information.

           

          Related people

          Nick Wallace

          • Senior Associate

          Andrew Flounders

          • Executive Partner (Leeds)

          David Frankland

          • Partner // Head of Commercial Occupiers Group